HOTELLING THE ECONOMICS OF EXHAUSTIBLE RESOURCES PDF

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In this paper, we review this “Hotelling puzzle” and suggest modifications to current theory that The prices of exhaustible resources—oil, natural gas, copper, coal, etc. . Review of Economics and Statistics 92 (2), Oil is an exhaustible resource. The economics of exhaustible resources is expressed through Hotelling’s rule. Hotelling’s rule states that the. Hotelling’s rule defines the net price path as a function of time while maximizing economic rent in the time of fully extracting a non-renewable natural resource. ” Hotelling’s ‘Economics of Exhaustible Resources’: Fifty Years Later”. Journal of.

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Click here to ask a question about this article. In the event of an increase in real price, producers are likely to be induced by the high prices to explore for more reserves resulting in an increase in resource stock Braddley As can be seen with the long history of petroleum regulation in the US, government intervention has generally been lacking in information and has been highly problematic in exhaustibble Adelman Hotelling’s article pointed out that economic behaviour of mining firms differs from behaviour of other industrial sectors.

However, the Hotelling theory, though elegant, seem somewhat misplaced.

These assumptions seem not applicable exhaystible the real world. Gray inconsidering the case of a single mine owner. But conditions require the optimal extraction path to fulfill the following relation Gaitan et al.

Other important meaning of the user cost is that it expresses the in situ resource of the resource, the value of the resource before the extraction for the mine producing at the marginal production cost. This is derived form the fact that the resource is non-renewable. In a similar vein, Ricardo explored on the significance of land quality on economic rent.

Assuming that the extraction is carried out with constant unit costs. Another error that Hotelling made was linking his highly conditional analysis to the real world Braddley Rev Austrian Econ Views Read Edit View history. Similarly, Jevons raised concern about the consequences of coal depletion on population growth Shogren This has been argued to mitigate the scarcity effect Krautkraemer Hotelling then asserted that if the total resource base and capital investments were fixed and efficient extraction methods used, then the marginal net revenue of extraction of non-renewable resource would rise at the rate of interest over time Hotelling The firm, extracting mine G at the marginal production cost, will be competitive only, if the market price covers its production costs and the opportunity cost see figure 1.

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The utility of consumption would be denoted by U Rt. This would not only decrease the transport costs, but will also increase efficiency in the supply chain and logistics. Hotelling rent, scarcity rent, user cost, royalty. Oil, gas, and government: This page was last edited on 12 Octoberat After Otto Other important meaning of the user cost is that it expresses the in situ value of the resource, the value of the resource before the extraction for the mine producing at the marginal production cost.

In an efficient exploitation of a non-renewable and non-augmentable resource, the percentage change in net-price per unit of time should equal the discount rate in order to maximise the present value of the resource capital over the extraction period.

Therefore a competitive mining firm will rise its production until its marginal production cost and the opportunity cost reaches the market price:. This concept was the result of analysis of non-renewable resource management by Harold Hotellingpublished in the Journal of Political Economy in InHarold Hotellingan American economist has published an article with title “The economics of exhaustible resources”, which findings serve as a basic theory for economics of non-renewable resources.

The opportunity cost or rather the shadow price at time t, Yt, is in the present case constant. The user cost has at least two important properties.

EconPapers: The Economics of Exhaustible Resources

The paper finds that while the Hotelling theory had contributed to the economics of nonrenewable resources and the rise of the conservationism movement, the assumptions laid out by the theory are not applicable to the real world. Whilst Hotelling was quick to recognize market failure, he failed to account for what is currently known as government failure Braddley But when there is a fall below the ppm level, the prices are bound to rise again Chakravorty et al.

Hotelling’s rule defines the net price path as a function of time while maximizing economic rent in the time of fully extracting a non-renewable natural resource. As such, the price of the natural resource should increase with time, provided that the marginal costs are kept constant Chakravorty et al.

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In Summary, the Hotelling theory has contributed to the economics of nonrenewable resources.

Hotelling’s “Economics of Exhaustible Resources”: Fifty Years Later

Moreover, the assumption of an increase in scarcity of non renewable resources is highly debatable. He also argues that such wasteful forms of exploitation would have been regulated in the interest of the general public Braddley Whilst the transport costs are account for a small percentage of the total costs, the optimal extraction solution must also take into account the total logistics costs. It has formed the conceptual and theoretical framework used by economists to model the supply and the prices of nonrenewable resources.

Therefore fhe competitive mining firm will rise its production until its marginal production cost hoteloing the opportunity cost reaches the market price: The economic rent obtained is an abnormal rentoften referred to as resource rentsince it generates from a situation where the resource owner has exhauxtible access to the resource for free.

If there is still unsatisfied demand for the resource in the time of its exhaustion, it means that the price was not optimal, it could not fulfil the function to regulate the behaviour of consumers, or the backstop technology is still not available. By using this site, you agree to the Terms of Use and Privacy Policy. The concept of resource rent also includes biological and other renewable resources. He began by recognizing the inadequacy of the standard economic analysis in the industry in which production was bound to decline Bradley Then the optimal path of extraction of the natural resource would be found by the following equation.

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Economists have long been concerned with the extraction of natural resources. More so, it has contributed to the conservationist movement. Egalitarianism as a revolt against nature and other essays, Auburn, AL: Pierce and Turner, Otto et al.

Error, group does not exist! Devarajan and Fisher note that a similar result was published by L.